Also in WSJ.com:

Markets Pulse

Japan’s Call for Weaker Yen
Spurs Talk of Copycat Moves

By Takashi Nakamichi, Tatsuo Ito

Prime Minister Shinzo Abe, right, in Tokyo on Thursday, made more-aggressive policy a centerpiece of his winning election campaign.

Associated Press

Unusual explicitness from Japan’s new leaders has helped convince the market they are serious about weakening the yen to revive the nation’s embattled exporters, but such moves threaten to complicate Tokyo’s relations with the U.S. and other major trading partners.

Many central banks, including others in Asia as well as in Latin America, have been trying to keep their currencies from becoming too strong after the Federal Reserve and European Central Bank adopted super-loose monetary policies that have suppressed their currencies.

Confronted by weakening domestic growth, nations around the world are trying to support their economies by boosting exports. Weaker currencies make a country’s exports cheaper. Japan’s latest signals mark a bid to help its exporters as the yen faces upward pressure from investors fleeing other trouble spots.

Senior Japanese officials, led by Prime Minister Shinzo Abe, have signaled they are determined to keep the dollar above ¥85 through further monetary easing and other bold measures.

The dollar broke above ¥86 after Asian markets closed Thursday, hitting a 28-month high of ¥86.16. The yen has since regained some ground, capitalizing on its status as a haven, after Senate Majority Leader Harry Reid (D., Nev.) warned the U.S. may go over the fiscal cliff, triggering automatic spending cuts and tax increases economists say could push the U.S. into recession. At Thursday’s peak, the dollar had climbed about 11% this quarter.

Mr. Abe made more-aggressive policy one of the centerpieces of his winning election campaign, and analysts and investors say he has been so successful that there could be copycats among other nations looking to see a similar result.

“This is another salvo in what you might call the global currency war,” said Richard Franulovich, a senior currency strategist with Westpac Banking in New York. “Abe has taken a radical approach and people are learning from that lesson.”

The yen’s weakening has the potential to ripple across Asia, as other economies look to follow suit. Unlike decades past, Japanese manufacturers directly compete with neighboring economies such as South Korea, Taiwan and increasingly China on high-end electronic, automotive and industrial goods. That dynamic could force Japan’s neighbors to suppress their currencies.

In the case of China, any signs it is intensifying efforts to keep a cap on the yuan could in turn resurrect tensions between Washington and Beijing over the currency issue, which had subsided in recent months. A China move would also be more broadly felt by its emerging-market competitors in places such as Latin America and Southeast Asia.

In South Korea, which is wrestling with a surge in the won this year, the country’s central bank was particularly blunt Thursday, saying it said it would prioritize economic recovery when it reviews its official interest rate each month.

Other countries in recent years—including Israel and Switzerland—have taken strong action to prevent their currencies from strengthening too much and hurting exporters. Brazil stoked international tensions two years ago by complaining of a “currency war,” blaming the U.S., Europe and China and others for pushing their currencies lower to boost their competitiveness. Leaders in those regions have said they are only trying to support their own economies.

Brazil has said the flood of cheap money flowed into the country searching for higher returns from higher interest rates. The effect was to inflate the Brazilian currency, which in turn made it harder for local manufacturers to compete. Despite chiding other nations for weakening currencies, Brazilian officials have sought to weaken the real, by putting restrictions on foreign investment and reducing interest rates.

Australia has also been wrestling with the impact of a high currency. The Australian dollar breached $1.10 in July 2011—the first time since it was floated in 1983—and has remained at elevated levels for much of the following 18 months despite a weakening in commodity prices. This sharp run higher has hurt the nation’s manufacturing, education and tourism industries—three of the largest sectors of the country’s economy.

In Japan, however, the sharp moves in the dollar-yen exchange rate have drawn cheers from domestic manufacturers, whose products become more competitive in the international market when the yen falls relative to other currencies.

A weak yen is “good news” for Japanese firms and could have “a significant impact” on their bottom lines, said Tadashi Okamura, head of the Japan Chamber of Commerce and Industry, a major business organization. “That’s because companies have compiled business plans forecasting below-¥80 levels.”

Over the weekend, Mr. Abe said that with the dollar above ¥85, “companies that haven’t been paying taxes until now can pay taxes” because a weaker yen lifts profit. Those remarks came on the top of comments Friday by Shigeru Ishiba, the ruling Liberal Democratic Party’s No. 2: “We need to think about how to maintain [the dollar] around ¥85-¥90.”

Economy Minister Akira Amari added his voice on Thursday, saying the yen “is making headway toward the appropriate level” and that the government “must ensure that this movement will take hold.”

A weaker yen could inflate Japan’s import bill by making overseas goods more expensive. Still, the overall economic impact of yen drops would be positive until the dollar rises sharply above ¥100, said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute.

Mr. Abe’s quest to undercut the yen has won sympathy from some government policy makers irked by years of yen strength. Yet it has raised concerns abroad that he may stir tensions in the global currency market.

“There’s a risk Japan would be misunderstood by foreign countries” as trying to manipulate the yen’s levels to the advantage of its companies, a Japanese government official said.

Japan’s solo interventions in the currency market invited a harsh reprimand from the U.S. Treasury Department in late 2011, despite Tokyo’s argument that the actions were legitimate. U.S. officials said at the time that Japan should take action to address more fundamental problems in its economy rather than resort to currency interventions. Both countries’ currencies can face upward pressure from global haven flows, particularly during international crises.

Former Finance Minister Jun Azumi, who oversaw Tokyo’s intervention in late 2011, has privately told subordinates that U.S. officials complained to him “on various occasions” about the intervention, according to a former aide.

Should the new finance minister, Taro Aso, also go out of his way to cite lower yen levels as favorable, “that could invite a considerable amount of booing and complaint from the U.S. and Europe,” said Kenji Yumoto, vice chairman of the Japan Research Institute.

Mentioning preferred exchange-rate levels also tends to trigger speculation about when Japan’s authorities will step into the market to artificially influence the yen’s levels. Such speculation often stokes volatility.

“People would start asking, ‘Will the government intervene when the dollar tops ¥90? Will it intervene when the dollar slips below ¥85?,’” the government official said.

But having been well-briefed by finance ministry officials on the pros and cons of commenting on currency movements, Mr. Aso is unlikely to cross the line, government officials said. Other cabinet ministers will probably stop discussing yen levels once they settle into their roles, they said.